Fixing FICC

Returning Goldman’s
GS, +2.08%
prized fixed income, currency, and commodities (FICC) sales and trading business — where Blankfein, Schwartz, and former President Gary Cohn made their names — to form will be top, or close to top, of the list.

In 2017, it was a disaster.

FICC revenues ended 2017 down 30% year-over-year; in the fourth quarter, revenues of $1bn were the lowest since Goldman began breaking out figures for that business in 2010.

Part of the problem is the bank’s strong bent towards commodities, a business from which many rivals have retreated and which tanked in 2017. In the second quarter, Goldman’s 40% decline in FICC revenues was attributed largely to commodities — but it did not disclose the size of the loss.

The bank’s decision to stick with commodities has been seen as a bet that the U.S. administration under President Donald Trump will repeal, or soften, Wall Street regulations such as the Volcker rule — something that may yet come to pass.

Another part of the FICC problem is Goldman’s heavy reliance on hedge fund clients — over corporates — which trade less in calm markets. Blankfein admitted last year that this mix “hurt” the bank.

Goldman has had a harder time building corporate relationships because it does not have a standalone corporate bank like rivals JPMorgan, Citigroup and Bank of America Merrill Lynch. Those banks develop relationships with corporates by lending money, which then helps win trading business.

Goldman announced last September that it would increase financing to corporate clients by $5bn to help remedy the problem. Sceptics, however, have questioned how committed the bank will be to this strategy if hedge fund business picks up again as volatility returns.

The relocation equation

Goldman is on the move, home and abroad, and the new CEO will have ultimate oversight of how the bank positions its global workforce to win new clients, battle Brexit and cut costs.

One of the ways Goldman is hoping to attract more corporate and investment banking business is by moving bankers closer to their clients. In the U.S., this means staffing up regional offices in cities like Atlanta, Dallas and Seattle and in Toronto, Canada. Financial News has reported that a similar initiative is underway in Europe, with up to 40 client-facing bankers moving from London to cities including Milan, Frankfurt, Paris, Madrid and Stockholm.

Then there is the UK’s impending split from Europe. Prior to the Brexit vote in June 2016, Goldman was planning how to move its roughly 6,000-strong London workforce into a new nine-storey, 1.1 million square foot HQ in the Square Mile. Since then, things have become less certain with Blankfein himself suggesting in a tweet that Goldman could struggle to fill the premises. The bank has identified Paris and Frankfurt as new hubs for serving EU clients in the post-Brexit world and has already lined up office space in Germany’s financial heartland.

Goldman has also been relocating back-office and support staff to lower-cost centres in recent years. Headcount in Salt Lake City, Utah, was last year up around 80% over a five-year period. In Europe, Goldman has chosen Warsaw in Poland as its tech and operations base, with plans for new hires already in train.

Transitioning to tech

It’s nearly three years since Blankfein described Goldman as a “technology company”. A challenge for his successor will be moving towards this goal without destroying Goldman’s banking DNA.

Blankfein’s most recent public speech at a Credit Suisse forum on February 13 was full of tech buzzwords. Around a quarter of staff in Goldman’s FICC business are engineers, while 70% of new hires within its equities team last year were in tech. Clients can now engage with “apps, machine learning and big data analytics” and the bank has 7,000 customers using Marquee, its open source trading platform.

And don’t forget Marcus, Goldman’s fledgling online retail banking platform. While most retail banks fend off competition from fintech startups, Goldman has taken the view that it can be a “disruptor” with a balance sheet to match. This has led to efforts in the realm of robo-advisory as well.

The bank has also been developing electronic solutions to business areas that have so-far resisted automation. It has created a new electronic platform called Deal Link, which aims to eliminate a lot of the grunt work carried out by junior bankers on public shares sales, and has expanded its algorithmic corporate bond trading programme.

Central to Goldman’s success in tech will be its ability to shed its image as a big corporate and appeal to technologists, who have plenty of options elsewhere.

Managing millennials

Solomon, who also performs as a disc jockey under the name DJ D-Sol, has been described as the “perfect CEO for the millennial generation” by Graham Ward, a former co-head of European equity trading at Goldman.

This could serve the bank well in its bid to stop junior employees from running off to private equity, hedge funds and tech. A junior’s decision to leave can stem from burnout as the first two years in investment banking are typically very strenuous.

Goldman took the matter seriously in 2015 when its investment banking division announced an initiative — led in part by Solomon — to lessen the workload of juniors and encourage young bankers to stick around.

The initiative included fast-tracked promotions for top-performing analysts to the role of associate after two, rather than three, years. Goldman also introduced a formal mobility programme to encourage junior bankers in their third year to move to another location with the bank, as well as new technological platforms like Deal Link to take over some of the work. Deal Link reduces how long it takes to create an IPO timeline and calculate fees from a period of about six hours down to about 30 minutes.

Senior management has been very vocal on this issue. Speaking to graduate intakes in recent years, Blankfein and former investment banking boss Michael Sherwood have stressed the importance of avoiding overwork and not being bound to specific timetables for success.

Addressing inequality at the top

Like most of high finance, Goldman has a problem getting women into its top, decision-making roles. With the issue of gender equality now firmly on the corporate agenda, Goldman’s next boss will need to show the bank is capable of making headway in this area.

Just four of the 32 members on Goldman’s management committee — which still includes Schwartz — are women; just two of these make it onto the 11-strong executive officer team and neither are in fee-earning roles or lead revenue-producing units from which CEOs are typically drawn.

It is telling that since the news of Blankfein’s planned departure broke, only Solomon and Schwartz have been named as potential successors. None of the bank’s four executive women have been touted as serious contenders. Goldman’s former global head of human capital management, Edith Cooper, who was widely seen as the most senior woman at the firm, left in January.

In the UK, Goldman has been slower than others in committing to the Women in Finance Charter, a government-backed plan to get more women into management roles in the City. The bank was chided for its tardiness last year and has since agreed to sign up.

Goldman’s new leader will need to keep a close eye on — and encourage — progress to ensure that when it is time to pick the next CEO, the bank will be able to point to at least one potential female candidate.

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